Overnight the PBOC injected another CNY95 billion into its banking system bringing the total weekly injection to a record CNY1.13 trillion.

However, it was not enough and overnight China allowed its five biggest banks to cut their reserve requirement ratio by 1% taking it down to 16% thus temporarily lowering the amount of money that they must hold as reserves to relieve pressure in its financial system as demand for cash surges ahead of the Lunar New Year holiday, Reuters reported. The banks affected by the move iclude ICBC, CCB, Bank of China, Bocom, and Agricultural Bank of China. The last time the central bank cut RRR was Feb. 29, 2016. The move is expected to release approximately 630 billion yuan in liquidity.

The dramatic moves come in a bid to avert a cash crunch heading into the country's biggest holiday of the year.

Earlier in the week short-term funding costs had spiked to their highest levels in nearly 10 years on fears that liquidity was sharply tightening, sparking a jump in the yuan currency. But China watchers polled by Reuters had not expected a cut in RRR until the third quarter of 2017, as such a move would put more pressure on the ailing yuan. Following the massive central bank liquidity injections, key funding and money market rates showed signs of easing on Friday but remained well above normal levels.

But wait, that's not all, because also overnight, the PBOC said it provided a "temporary liquidity facility" to some major commercial banks for 28 days to help ease a cash crunch before the Lunar New Year holiday. According to Bloomberg, the operation provides more effective liquidity transmission before the week-long break, the People’s Bank of China said in a statement Friday.

The PBOC said the new lending facility will have a funding cost for banks that’s around the same as open-market operations for a similar 28-day period, which is about 2.55 percent. That means the tool differs from cutting the ratio of deposits big banks must hold in reserve and suggests a fresh evolution of tools policy makers have been overhauling.

Commercial banks had 11 trillion yuan ($1.6 trillion) of sovereign and financial bonds outstanding as of December, Ming said, and have pledged about 43 percent of those to access funding through central bank open market operations, limiting room for further such operations.

The PBOC’s statement Friday didn’t say whether the temporary funding required collateral. Should none be required, that would be unusual because most such tools involve collateral.

The PBOC has shifted toward selective tightening after a two-year easing cycle. President Xi Jinping and other policy makers decided at their annual economic conference last month China should plan prudent and neutral monetary policy this year to prevent financial risks.

"It’s too premature to conclude that there’s a change in China’s monetary policy direction," Raymond Yeung, chief greater China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong, wrote in a note. "Liquidity management and leverage control seem to be more appropriate expressions to describe the policy direction of China’s central bank."

"It’s likely the central bank will use temporary liquidity facility as a regular tool in the future to ease liquidity shortage before quarter-end or holidays," said Xia Le, chief economist at Banco Bilbao Vizcaya Argentaria SA in Hong Kong. The PBOC is using a new tool because older ones offer funds at a high cost and longer duration than needed, and it’s wasteful for banks that need money for five days to have to borrow for a full year, Xia said.

While in the past the PBOC has engaged in similar moves ahead of the new year, the latest move suggested there were additional factors involved in draining liquidity: "Today's move seems to suggest that liquidity conditions are tighter than authorities' expectations, as capital outflows remain strong," said Zhou Hau, senior emerging markets economist at Commerzbank in Singapore.

"But in the meantime, an outright easing will add pressure on the yuan exchange rate as well. That could be the reason behind today's strange move."

The central bank will restore the RRR for the five banks to the normal level at an appropriate time after the holiday, according to Reuters' sources. "This is a temporary adjustment, and is mainly in response to the cash withdrawal, tax payment and reserve payment. (The RRR) will go back to the normal rate after the Lunar New Year holiday," one source said.

The PBOC said later on Friday that it will provide temporary liquidity support for several major commercial banks for 28 days to ensure adequate liquidity ahead of the Lunar New Year, according to a notice posted on its official microblog. The funding cost for the liquidity support will be about the same as the open market operations rate over the same period, the PBOC said, without specifying any requirement for collateral.

As noted previously, Chinese liquidity always tightens in China ahead of the Lunar New Year holiday, which this year starts on Jan. 27 and ends on Feb. 2, as households and companies usually withdraw huge amounts of cash from banks. The central bank typically responds by injecting ample funds into the market.

But some traders say its injections this year have barely been keeping up with heavier demand. This year, the holiday also extends over the month-end, when corporate cash demand increases and some tax payments are due, adding to the strain.

Analysts estimate that every 50 basis point cut in RRR systemwide effectively injects an estimated $100 billion worth of long-term cash into the economy, which recorded its slowest growth in 26 years last year.

Due to its despotic corrupt leadership no one(not even chinese) are gona keep their funds invested at home if they can help it. I think this liquidity problem only gets MOAR! oh yeah and happy Trump day.

What happens, exactly, when they de-peg the yuan from the dollar? Are there going to be all sorts of exciting banking discoveries in the Chinese system? I do not understand how they establish the value of their currency.

The article said they weren't sure there was any collateral. How's that supposed to happen? If they weren't sure there probably was none. If there was none then this is indeed all bullshit. When this house of cards collapses I don't know but when it does look out below.

A lot of people have been waiting/hoping/predicting that the USD weakens and collapses (because of too much debt and money "printing" etc.) and then it gets replaced by the RMB as the reserve currency. A dollar-haters wet dream.

It should then come as no surprise that the exact opposite scenario is a distinct possibility whereby the RMB is weakening and greatly weakens (another 30-40%) and the USD strengthens and further solidifies it's grip.

If the U.S. has a $20TRILLION debt load and a strong dollar and a still robust UST/bond market and China by comparison has a $30TRILLION (RMB equiv.) shadowy debt load that 's exploding and a weakening currency and a bond market that is nowhere close to being comparable to the UST's or corporate bond market then it appears to me that it's China who'll stumble first and go through a major correction unless they print money like crazy (which it appears they now need to start doing) to hold off the day of reckoning a bit longer.

For all the talk of the huge US debt it's never really acknowledged that China's known debt is approx. 50% larger then the U.S. at this point. That's significant to keep in mind when considering what countries day of reckoning comes first in this modern era.

If and when the EU/euro collapses will the RMB and Chinese markets get a flood of money or will it be the USD/UST and stock market that'll see huge inflows of capital seeking relative safety? Whose currency will likely strengthen the most?

In the end a major Chinese/RMB correction could be the impetus for China to resort to an implied gold backed currency or bond market to project RMB confidence but that could be many years away and it would take a major market and economic disruption in China for that policy to be considered and implemented.

Or it could take a war to level each others cities and then the currency field.